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Canada’s ‘reshoring’ opportunity

DOUGLAS C. PIZAC/AP

Shares in Caterpillar Inc. are well off their highs for the year, but value-oriented investors thinking the stock could be an ideal play to ride a global economic recovery better think twice.

Joy Global Inc., a comparatively smaller but still large manufacturer of mining and other equipment worldwide, issued a stark warning Wednesday about how the fragile macroeconomic environment is taking its toll.

"The outlook for our business has continued to decline over the past quarter," said Joy Global president and chief executive Mike Sutherlin. "Although the U.S. market has progressed in line with our expectations, the deceleration of China demand has deteriorated international markets more quickly and severely than previously expected."

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Joy Global managed to post fiscal third-quarter earnings that were 12 per cent higher than a year earlier, but it warned fiscal 2013 revenue will be flat or down slightly if current market conditions continue. Declining prices for commodities such as iron ore, copper and coal in the face of the slowdown in the Chinese and European economies has delayed a raft of mining projects and diminished the need for pressing forward with project approvals, leading to thinner order books.

All this has RBC Dominion Securities analyst Caterpillar Seth Weber turning more cautious on competitor Caterpillar. He slashed his price target by $10 to $105 (U.S.) as he scaled back earnings and revenue projections for the company for fiscal 2013. He now forecasts earnings per share of $10 in 2013 instead of $10.55, on revenues of $73.2-billion instead of $74.9-billion. He kept fiscal 2012 earnings and revenue projections unchanged.

Mr. Weber, however, does see light at the end of the tunnel, and he reiterated an "outperform-average risk" rating. Joy Global said it believes commodity demand has reached bottom and fundamentals remain relatively good for copper. That has Mr. Weber encouraged about the long term.

"Big picture, we view CAT as well positioned to benefit from an eventual clearing in the macro clouds. Near term, we expect sentiment will remain mixed reflecting concerns including inventories (corporate and dealer level), China construction equipment supply/demand, and Europe," said Mr. Weber.

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Western Energy Services Corp.
Western Energy Services' stock has risen more than 25 per cent since the end of June, outpacing almost every oil and gas services company covered by Raymond James analyst Andrew Bradford. As a result, he downgraded Western Energy to "outperform" from "strong buy," adding that upcoming seasonal weakness in natural gas prices could be a "headwind for immediate near-term performance."

Upside: Mr. Bradford maintained a price target of $9.75.

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Pan Orient Energy Corp.
Shares in Pan Orient Energy have weakened over the past six weeks amid news of operational difficulties at the company's exploration drilling onshore Indonesia. "Our view is that the stock is likely to remain range-bound until the company is able to demonstrate that these challenges can be overcome in a cost-effective manner, and more conclusively demonstrate the value of its Indonesian assets," commented Raymaon James analyst Rafi Khouri.

Upside: Mr. Khouri cut his price target to $3.50 from $4.25 and maintained a "market perform" rating.

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Banro Corp.
Commercial production has begun at Banro's Twangiza gold mine in the Democratic Republic of the Congo, with initial output targeted at 8,000 ounces per month. The project is now expected to reach 10,000 ounces of monthly production over the next 12 months following a mill expansion, which is later than CIBC World Markets analyst Cosmos Chiu had expected.

Upside: Mr. Chiu cut his price target by $1 to $7 and reiterated a "sector outperformer" rating.

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Agnico-Eagle Mines Ltd.
Agnico-Eagle Mines Ltd. has "re-established market confidence" by meeting, and in some cases exceeding, expectations for its first-half results, an accomplishment many of its North American peers have failed to achieve, said RBC Dominion Securities analyst Stephen D. Walker. There's potential for modest near-term production growth and the company is generating sufficient free cash flow to fund its near-term growth plans, he added.

Upside: Mr. Walker raised his price target by $8 to $53 (U.S.) and maintained a "sector perform" rating.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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